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This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001?09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

Business & Economics --- Economic Theory --- Global Financial Crisis, 2008-2009. --- Bank failures --- Failure of banks --- Global Economic Crisis, 2008-2009 --- Subprime Mortgage Crisis, 2008-2009 --- Business failures --- Financial crises --- Banks and Banking --- Finance: General --- Financial Risk Management --- Industries: Financial Services --- Investments: Stocks --- Financial Institutions and Services: Government Policy and Regulation --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Portfolio Choice --- Investment Decisions --- Financial Crises --- Financial Institutions and Services: General --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Banking --- Finance --- Financial services law & regulation --- Economic & financial crises & disasters --- Investment & securities --- Liquidity requirements --- Liquidity --- Distressed institutions --- Financial regulation and supervision --- Asset and liability management --- Financial institutions --- Stocks --- Banks and banking --- State supervision --- Economics --- Financial services industry --- United States

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Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We find that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter finding as reflecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms.

Zonder onderwerpscode: economie

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